Budget speeches often have far more rhetoric than actual policy detail, and are often a bit weird – witness George Osborne highlighting the development of a local railway line in last week’s address. Aside from a few headline-grabbing surprises (or complete fiscal meltdowns), it is often the phrasing that sticks in the mind after the event, at least until the economic forecasts turn out to be hopelessly wrong. And the one that really stuck in my mind, after the March 23 Budget, was the call for the ‘march of the makers’.
Taken literally, this implies that Osborne wants manufacturing to drive the UK economy forward – after all, they are about the only people who make things. As I have pointed out before, pinning all our hopes on manufacturing would be daft – it accounts for just 13% of the UK economy, and the long-term trend in manufacturing’s share of national income is a downwards. There is nothing particularly unique to the UK here – the long term trend is the same just about everywhere else in the OECD (barring perhaps Germany) – but such a small sector cannot generate 2.5% increases in national income every year on its own. A succession of past governments and ministers have professed their support, admiration and even deep love for manufacturing, but not one of them has managed to arrest that long-term decline. Globalisation pays little heed to the desires of politicians in small, open economies.
To be fair to Osborne, however, I think his ‘march of the makers’ comment was meant to more broadly encapsulate private services as well – the hairdressers, IT support workers and (whisper it quietly) probably even the bankers. The overall aim is to get the private sector marching ahead, make Britain world class, and sell our goods and services to the rest of the world.
This ties into another oft-held aim of politicians – the desire to rebalance the economy towards exports (and investment), and be less reliant on debt-fuelled consumption. Leaving aside the fact that the claims about the latter are nearly always overstated – for instance, the vast majority of household debt is accounted for by mortgages, and didn’t directly fuel consumption at all – how likely is it that the UK is about to lurch towards genuinely trade-driven growth, like Germany and Japan?
Judging by the latest data, it is not very likely at all. Balance of payments data for the end of 2010 revealed that the trade deficit for goods was the highest on record, at almost Â£27bn. In part, some of that weakness may have reflected the snow in December (lorries couldn’t pick up and deliver export goods from factories, while goods imports made it to British harbours ok). But stepping back and looking at 2010 as a whole, the overall current account deficit actually widened to Â£36bn from Â£24bn in 2009. It turns out we haven’t seen a march of the makers as much as a backwards crawl.
Most of the swings in the trade and current account data over the past few years have reflected global conditions. World trade shrank by 20% during the recession, although it has now recovered. For a deficit country like the UK, we should expect that to manifest as a sharp fall in the UK deficit, followed by a subsequent reversal, which is what we’ve seen. But the bigger question remains: given that sterling is worth about 25% less than it was at the end of 2007, why haven’t the makers leapt forward and driven growth?
Three reasons leap to mind. First, most of the people we actually export to are still seeing relatively subdued recoveries, like us. The UK does not have Germany’s trade ties to China and the rest of developing Asia. Second, UK exporters do tend to ‘price to market’ – ie price goods in euros when selling to the French – so the exchange rate move is likely to have boosted margins (or at least made material cost rises less painful) rather than boosting export volumes and hence real GDP growth. (The margin effect should still show up in the current account balance, though.) And third, we haven’t seen the degree of internal substitution that we might have expected. A weaker exchange rate doesn’t just make UK exports cheaper or boost exporters’ margins – it also makes imports more expensive for UK consumers and producers (US and euro area firms tend not to price to market). Faced with these higher import prices, we might have expected UK households and businesses to buy fewer imported things, and switch to domestically produced items. This has not really happened – in part perhaps because there aren’t the UK producers to make the items consumers want to buy.
All told, the grand call for a ‘march of the makers’ may not come to much. Even at the time of sterling’s decline, I didn’t expect the UK to become a genuinely trade-led economy, in the sense of posting persistent trade surpluses that drove growth. On the evidence of the past couple of years, there has been little in the data to change my mind. Sterling’s fall should eventually lead to a smaller deficit – or even a period of broadly balanced trade, potentially – but that will take time. It will be more of a crawl than a march. And unless Osborne can come up with actual policies that work rather than just words – the UK still doesn’t have a genuine industrial policy, after all – he may well suffer the fate of other Chancellors; nice speech, but little real impact.